Coercive Contempt Sanctions Upheld by Second Circuit Under Inherent Authority

Bill Rochelle is on vacation. Please enjoy this piece written by Guest Writer Stephen W. Sather, a shareholder with Barron & Newburger, P.C. in Austin, Texas, who leads the firm’s Bankruptcy Practice Group.

The Second Circuit has upheld a bankruptcy court’s order awarding significant coercive contempt sanctions against an attorney who failed to comply with a subpoena directed to his client and who continued to ignore subsequent court orders. The case involved a jailed Russian debtor and a foreign representative appointed under Chapter 15 who sought to discover the debtor’s American assets.

Larisa Ivanova Markus is a Russian citizen who founded one of Russia’s largest banks. After the bank was declared insolvent, her creditors applied to the Moscow Arbitration Court for commencement of proceedings against her. The Moscow Arbitration Court appointed Yuri Vladimirovich Rozhkov to liquidate Markus’s assets. Rozhkov initiated a Chapter 15 proceeding for Markus in the U.S. Meanwhile, Markus was convicted of embezzling approximately $2 billion from the bank she founded.

In the U.S. Chapter 15 proceeding, Rozhkov sought to discover Markus’s assets. He served a subpoena on her in care of her American attorney, Viktor A. Worms. Attorney Worms tried unsuccessfully to quash the subpoena. He then made various excuses for noncompliance, including that his client was in prison in Russia and didn’t have access to her documents.

On July 30, 2019, the bankruptcy judge ordered Worms to “immediately communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents . . . to [the] extent the documents are in Markus’ possession, custody, or control.” This order now placed a duty on the attorney to take affirmative steps to seek compliance. When Worms requested an extension of time to comply, the court warned him that sanctions could be imposed. When he did not produce any documents, the court directed Rozhkov, the Foreign Representative, to file a motion for contempt.

The Foreign Representative filed a motion seeking coercive sanctions of $1,000 per day and provided a chart of known agents of Markus, along with their contact information. The court granted the motion and ordered Worms to pay attorneys’ fees and to pay $1,000 per day in sanctions beginning on the date that compliance had been due. Ultimately, one of Markus’s agents in the U.S. made the required requests, and over 8,000 pages of documents were produced. By the time that the bankruptcy court found that Worms was no longer in contempt, he had incurred $55,000 in daily penalties and $36,000 in attorneys’ fees.

After various appeals and remands, the case reached the Second Circuit. Worms made two arguments. First, he asserted that the bankruptcy courts lacked inherent authority to impose civil contempt sanctions. Second, he argued that he had not received due process.

Resorting to inherent authority was necessary because of the unique procedural posture of the case. Worms had violated an order enforcing a subpoena under Fed. R. Civ. P. 45. Contempt under Section 105(a) was not available, because that provision can only be used to enforce title 11. Sanctions under Fed. R. Civ. P. 37 were not available, because the matter involved enforcement of a subpoena rather than discovery addressed to a party.

The Second Circuit noted that the authority to impose non-nominal civil contempt sanctions was an issue of first impression in the circuit. Because Section 105(a) was not available as a source for contempt sanctions, the court had to look to its inherent authority. Under Chambers v. NASCO, Inc., 501 U.S. 32 (1991), the power to punish contempt “is inherent in all courts.” While Chambers involved an Article III court, its mandate has been held to apply to bankruptcy courts as well.

While the Second Circuit had upheld the inherent power of bankruptcy courts to “impose relatively minor non-compensatory sanctions on attorneys appearing before the court in appropriate circumstances,” it had not opined on “the outermost boundaries” of that power.

The court set out several principles for punishing civil contempt under its inherent authority. First, the court must invoke its inherent authority and find that its express authority was not up to the task. It must provide due process before imposing contempt sanctions. If an attorney is to be punished for actions taken in the course of representing a client, a finding of bad faith is required. Any sanction awarded must be either compensatory or coercive as opposed to punitive. Finally, the contempt must be shown by clear and convincing evidence.

The Second Circuit found that resorting to the bankruptcy court’s inherent authority was proper, because there was not another mechanism for compelling compliance with an order to enforce a subpoena. The court upheld the finding that Worms had acted in bad faith based on the bankruptcy court’s factual finding that he had “brazenly” disregarded the court’s discovery orders, including disregarding two court-imposed deadlines for compliance. The court also found it significant that he did not make any effort to purge himself of contempt, but rather waited until a third party complied with the order. Finally, the court found that there was no fair ground for doubt as to his obligations under the order.

This case was unusual due to its procedural posture. Normally, discovery obligations are imposed upon clients rather than counsel. However, in this case, the client had little direct ability to comply, since she was incarcerated in another country. The attorney could have informed the court that he was unable to obtain cooperation from his client and perhaps sought to withdraw. Instead, he stated that there were not any responsive documents, a representation that ultimately proved to be untrue. When the court did impose a duty upon the attorney, it also provided him with a means of compliance. However, he failed to make any effort to take the steps provided by the court leading to a finding of bad faith. The decision is a stark lesson that court orders are serious matters not to be trifled with.